NU Online News Service, March. 17, 1:45 a.m. EDT

WASHINGTON—The Federal Deposit Insurance Corporation has issued an interim final regulation dealing with the liquidation of a troubled non-bank financial company, including an insurer.

It gives the agency sole discretion over whether it will take a lien on insurance company assets if the FDIC is appointed receiver of the insurance company and it advances funds to facilitate the orderly liquidation of the failing company under Title II, according to an industry lawyer.

The lawyer, who asked not to be named but is based in Washington, D.C., said the rationale given by the FDIC for this authority is that this "will best avoid the possibility of harmful delay and help ensure a speedy and orderly liquidation process."

The lawyer said that the big insurance issue "is a fear that the FDIC liens could somehow take precedence over insurance claims in the run off liquidation process."

The FDIC issued the rule under authority of Title II of the Dodd-Frank financial services reform law.

The provision gives authority to the FDIC to take over a troubled non-bank holding company based on a determination by the Federal Reserve Board, the Federal Office of Insurance, and the Treasury Department, in consultation with the FDIC, that the company is in default or imminent danger of default and that the company's failure would have serious adverse effects on the nation's financial stability.

The industry's concern with the regulation is exacerbated, the lawyer said, because the Obama administration has yet to name the two "statutorily prescribed insurance voices on the Financial Stability Oversight Council," an independent insurance representative.

Lawyers for several firms that deal with insurance companies cautioned that in the case of insurance companies, the FDIC authority is only a backup.

It will rarely be used, two lawyers said, because the provision of the Dodd-Frank law the rule implements "to a great extent gives the states primary authority to resolve troubled insurance companies domiciled in their states."

Moreover, if a state declines to get involved, and federal regulators determine that liquidation is still required, the FDIC is required to wind down those companies under state insurance laws, one of the lawyers said.

The lawyers, both based in Washington, D.C., asked that their names not be used.

The FDIC said in the interim final rule that it would take a lien if it makes the determination, in its "sole discretion," that the lien is "necessary for the orderly liquidation of the company" and "will not unduly impede or delay the liquidation or rehabilitation of the insurance company or the recoveries by its policyholders."

The Property Casualty Insurers Association of America (PCI) has previously expressed concern that the FDIC's exercise of "sole discretion" to take such a lien, without apparent deference to or even consultation with state regulators, would amount to undue interference with state authority over the regulation of insurance companies.

The FDIC acknowledges this issue in the interim rule, citing a provision of Dodd-Frank that says "in general," the liquidation of an insurance company under Title II shall be conducted as provided under state law.

But the FDIC concluded that it should have the sole discretion to make the determinations of whether a lien is necessary for a company's orderly liquidation, and that the lien would not unduly impede or delay the liquidation or rehabilitation of the insurance company or the recoveries by its policyholders.

Story was updated by removing the reference to an FIO director not being named. Shortly after this story was posted, the Treasury named Michael McRaith as FIO director.

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